Four Insider Trading Theories Every Compliance Team Should Understand for Digital Markets
Why decades-old legal principles remain the foundation for insider trading enforcement in the age of digital assets, tokenization, and prediction markets.
One of the most frequent questions I hear from compliance professionals is whether the rise of digital assets, tokenized real-world assets, and prediction markets will require regulators to rewrite the insider trading rulebook.
Increasingly, the answer is no.
While markets are evolving rapidly, regulators are not abandoning decades of established legal precedent. Instead, they are applying familiar insider trading principles to new asset classes, trading venues, and technologies. Whether the instrument is a public equity, a tokenized security, a cryptocurrency, or a prediction market transaction, the underlying questions remain remarkably consistent.
- Was confidential information involved?
- Did someone owe a duty of trust or confidence?
- Was that information used for personal financial gain?
Understanding how regulators answer these questions is becoming just as important as understanding the technologies themselves. The firms best positioned for the future will not simply monitor new asset classes—they will understand how existing legal theories apply across an increasingly connected financial ecosystem.
It Still Starts with the Fundamentals
Every modern insider trading case begins with the same foundation: the classical theory of insider trading.
The principle is straightforward. Directors, executives, employees, and others who owe a fiduciary duty to shareholders cannot trade while in possession of material, nonpublic information (MNPI). Traditionally, this has meant trading shares in the company whose information they possess.
As financial products evolve, however, the principle itself does not change. If a traditional security can be represented as a token or another regulated digital instrument, regulators are unlikely to view the technology as a reason to apply a different legal standard. The obligation to protect confidential information remains the same, regardless of how that financial exposure is created.
For compliance teams, this means employee trading policies should be written broadly enough to encompass evolving financial instruments rather than focusing exclusively on traditional securities.
When the Insider Isn’t an Insider
Not every insider trading case involves someone employed by the company whose information is being misused.
Misappropriation theory addresses a different scenario, one in which an individual gains access to confidential information through a relationship of trust and confidence and then uses that information for personal benefit.
Investment bankers, consultants, accountants, lawyers, technology vendors, and other third parties may all have access to sensitive information long before it becomes public. Their responsibility is not defined by who employs them, but by the duty they owe to the source of that information.
This theory becomes particularly relevant as new markets emerge. Rather than purchasing shares in a company, an individual could use confidential knowledge to trade a prediction market contract linked to a regulatory decision, product approval, merger activity, or macroeconomic event. The instrument may be different, but the alleged misuse of confidential information remains fundamentally the same. Recent enforcement actions involving prediction markets demonstrate that regulators are already willing to apply these longstanding principles in new contexts.
For compliance programs, the implication is clear. Employee trading policies can no longer focus solely on brokerage accounts. They should also consider prediction market platforms, digital asset exchanges, and other emerging trading venues where confidential information could be monetized.
Shadow Trading Changes the Conversation
If misappropriation theory expanded who could become an insider, shadow trading has expanded what can be traded.
The significance of SEC v. Panuwat was not simply the outcome of one enforcement action. It fundamentally changed how compliance professionals should think about insider trading risk by demonstrating that liability may extend to an economically related asset rather than the security directly connected to the confidential information.
For years, employee compliance programs have focused on monitoring whether someone traded securities issued by their employer or a restricted company.
Shadow trading asks a different question, “What if an employee profits by trading something economically connected to the confidential information they possess?”
Digital markets make this challenge even more complex. Blockchain ecosystems are built around interconnected assets. Layer 1 and Layer 2 protocols influence one another. Tokenized real-world assets often respond to the same economic events. Prediction markets create additional opportunities for individuals to gain economic exposure without ever purchasing the underlying security.
Traditional restricted lists were never designed for this level of interconnectedness. Increasingly, compliance teams must understand relationships between assets rather than simply monitoring individual securities.
Beyond Trading: The Broader Conduct Risk
Prediction markets introduce another important dimension to insider trading discussions.
The challenge is no longer limited to whether someone traded while possessing confidential information. Compliance teams must also consider whether individuals can influence the outcomes on which they are trading or exploit confidential business information in ways that fall outside traditional securities markets.
Questions that once seemed hypothetical are becoming increasingly practical.
- Could an executive trade on an event contract tied to a business decision they can influence?
- Could confidential operational information move the probability of an event contract before it affects a company’s share price?
- Could an unrelated macroeconomic contract provide indirect exposure to confidential corporate information?
These are precisely the types of questions regulators, exchanges, and compliance professionals are beginning to examine as prediction markets continue to mature. At the same time, exchanges are strengthening surveillance and market integrity controls in response to increasing regulatory scrutiny and the growing importance of detecting suspicious trading activity.
The Markets Are Changing. The Principles Are Not.
The biggest takeaway for compliance leaders is that regulators are not creating an entirely new body of insider trading law for digital markets. They are applying established legal principles to increasingly sophisticated forms of trading.
The instruments may change, but expectations around trust, confidentiality, and market integrity are not.
For firms, this means insider trading compliance can no longer focus solely on listed securities. It must extend across digital assets, tokenized markets, prediction platforms, and any other venue where material non-public information can be converted into economic gain.
That requires more than updating restricted lists. It requires understanding how information moves across markets, how assets are connected, and how employee behavior is evolving alongside financial innovation.
At StarCompliance (Star), we believe this is where Connected Compliance becomes essential. By bringing together employee trading, digital assets, prediction markets, surveillance, and data-driven analytics within a single compliance ecosystem, firms can identify emerging risks earlier and respond with greater confidence. As markets become more interconnected, compliance must do the same.
Looking Ahead
The future of insider trading compliance will not be shaped by entirely new legal theories. It will be shaped by how effectively organizations apply existing principles to increasingly complex markets.
To learn more about how Star can elevate your compliance platform, click [HERE] to book a demo.
